Australian dwelling approvals near decade lows in September

Australian dwelling approvals fell by 4.6% in September, declining for the third time in the past 4 months. Quarterly approvals fell below 40k to be in line with decade lows. Higher interest rates and other headwinds are continuing to impact the home-building sector, despite rapid population growth generating strong demand.

Headline dwelling approvals declined by 4.6% month-on-month in September (13.1k), defying expectations for a 2.5% rise and partially handing back the 8.1% increase from August. Both major segments posted declines this month: houses -4% and units -5.8%, unable to press on from sizeable increases last month (houses 7.5% and units 9.2%). 

Quarterly approvals eased back to 37.1k (-4.2%q/q), the second lowest total in the past 10 years and down more than a third on the cycle high in Q2 2021 (60.6k). This was driven by a 16.1%q/q fall in unit approvals to 14k, a total slightly below the depths seen during the pandemic in 2020 amid closed borders. By contrast, house approvals lifted by 3.8%q/q to 25.7k but are only just above cycle lows. 

Drilling down further, approvals are at low levels across all dwelling types. Weakness in the high-rise segment was notable in the September quarter and was behind the fall in unit approvals. 

By value, alteration approvals returned to record highs in quarterly terms ($3.2bn). This is in line with the levels seen during the pandemic when alterations surged, with construction subsidies and low interest rates in effect. The renewed strength partially reflects cost increases; however, there may be a demand component as well. The negativity that has been associated with home building of late due to delays and insolvencies (among other things) may be seeing many people opting to renovate instead. The effect of higher interest rates might also be supporting renovations to the extent that reduced borrowing capacity is weighing on upgrading activity. 

At the state level, Victoria - despite approvals declining 8.9% in September - saw the strongest outturn of all states in the quarter with approvals lifting by 13.5%. Western Australia (6.1%) and Tasmania (10%) also saw approvals rise over the quarter. In New South Wales, approvals contracted very sharply (-25.7%), which was centered in the high-rise segment. Approvals in Queensland (-1.4%) and South Australia (-10%) fell in Q3. 

Australian retail sales accelerate 0.9% in September

Australian retail sales accelerated by 0.9% month-on-month in September, coming in well above expectations (0.3%) and posting its strongest rise since January. The ABS reported that spring weather drove increased spending across a range of categories, while the release of iPhone 15 and an energy efficiency rebate on appliances in Queensland were also contributing factors. This latest outturn combined with upward revisions to prior months saw retail sales rise by 0.8% in the September quarter, lifting from a 0.4% increase in the June quarter.

Headline retail sales (0.9%m/m) saw their strongest rise since the start of 2023, with both food (1%) and discretionary-related spending (0.9%) advancing sharply. Sales were revised up for July (0.5% to 0.6%) and August (0.2% to 0.3%). Overall, in Q3, retail sales advanced by 0.8%, driven by a 1.1% uplift in discretionary sales. This was a clear acceleration from weaker outcomes for retail sales in Q1 (-0.1%) and Q2 (0.4%), despite cost-of-living pressures and rising interest rates continuing to impact households. The rapid pace of population growth (running at around 2% in annual terms on most estimates) will be playing a role here. More detailed estimates of spending and underlying volumes are due to be published by the ABS on Friday. 

The strongest gains in September came in department stores (1.7%) and household goods (1.5%). Department store sales have held up relatively well amid the headwinds rising by 1.3% over the year. By contrast, household goods have contracted by 4%yr; September's 1.5% rise defied this weakness, with the category being supported by the release of iPhone 15 and government rebates for households to switch to more energy-efficient appliances in Queensland. The ABS attributed the warm start to spring in Australia as supporting areas of spending such as clothing and hardware. Although there was no apparent boost for cafes and restaurants (0%), spending in the category is at record highs. Meanwhile, basic food (1%m/m) surged by its most in 12 months.    

         

Strength in September sales were reflected at the state level. Spending lifted by 1.3%m/m in New South Wales and by 1.2%m/m in Victoria, with these two states accounting for close to 60% of turnover nationally. Tasmania (1.8%) and South Australia (1.0%) rose for the first time since June and May respectively. Sales in Queensland were softer at 0.5%m/m but Western Australia (0.1%) saw the weakest gain. 

Macro (Re)view (27/10) | Weak sentiment continues

Risk aversion remained prominent this week weighing on equities, with US declines compounded by disappointing results on the earnings front. Chinese equities advanced on news that the authorities will attempt to shore up growth via new fiscal measures. Strong GDP figures for Q3 reaffirmed the growth differential in the US over Europe as the decline in activity in the bloc according to the PMI gauge in October slid to a 3-year low. Weak growth was a factor in the ECB's decision to leave rates on hold this week, while the Bank of Canada was also unchanged. In Australia, the RBA is now expected to resume its tightening cycle after Q3's CPI data surprised on the upside of expectations. The AUDUSD lifted modestly over the week after going into the report near the lows for the year.

Australia's stronger-than-expected inflation outcomes in the September quarter may prompt the RBA to resume its tightening cycle. Prior to the report, RBA Governor Michele Bullock said in a speech that a "material upward revision to the outlook for inflation" would require additional tightening. But later in the week at a Senate estimates appearance, the Governor would not be drawn on whether Q3's CPI outcomes would constitute making this material revision to the forecasts. Australia's 3-year government bond yield spiked by around 15bps as the CPI data printed and then firmed over the rest of the week to close just above 4.3% - implying further RBA tightening is now largely priced in. 

Quarterly inflation lifted in Q3 as both the headline and core rates came in at 1.2%, above expectations (headline 1.1% and core 1%) and up from 0.8% and 0.9% respectively in Q2. While fuel and electricity prices were major contributors, rising prices in the core of the basket indicate that inflationary pressures were broadly based. There were sizeable declines in annual inflation: headline retraced from 6% to 5.4% (vs 5.3%) and core down from 5.9% to 5.2% (vs 5%), but given the quarterly run-rates the RBA's forecasts for end 2023 (headline 4.1% and core 3.9%) look unlikely to be met. Upward revisions there would have implications for the outlook beyond this year. But it is hard to tell whether or not the timing for a return to the inflation target (currently projected by the RBA to occur in late 2025) would have shifted much based on this week's events. This assessment will ultimately be key to the extent of any further tightening delivered by the Board. In-depth analysis and charts covering the CPI data can be found in my review of the report here. 

Strong September quarter GDP underlined the resilience of the US economy. Activity accelerated by 1.2% quarter-on-quarter (2.9%Y/Y) to post its strongest quarterly expansion since Q4 2021, with households powering growth. Personal consumption data reported spending in real terms advanced by 1% in the quarter and 1.7% on a nominal basis. Household demand appears to have strengthened alongside a reduced real income drag as inflation has declined, with the labour market remaining a key underpinning. Headline inflation according to the PCE deflator was 3.4%yr to September, down from a 6.6% pace 12 months ago, while the core deflator held at 3.7%yr compared to 5.5% in September 2022. 

In Europe, the ECB held its key rates steady for the first time since the tightening cycle commenced in July last year. After 450bps of rate hikes (and some €1.8tn in balance sheet reduction), the Governing Council's tone has shifted to a higher for longer narrative, similar to the Fed. The decision statement reiterated a message that emerged at the previous meeting, with rates judged to be at levels that - if held for a "sufficiently long duration" - will assist to a substantial degree in returning inflation back to its 2% target. In the post-meeting press conference, ECB President Lagarde spoke of the forceful transmission of its earlier rate hikes into financial conditions, highlighting weakening loan demand and tighter credit standards reported in its latest bank lending survey. Lagarde said that there was no discussion this week on a potential earlier end of PEPP reinvestments. 

Australian Q3 CPI 1.2%, 5.4%Y/Y

Australian inflation printed on the top side of estimates in the September quarter, with markets now anticipating the RBA to resume its hiking cycle at the November meeting. While volatile fuel and electricity prices were responsible for the upside surprise in headline inflation (1.2%q/q / 5.4%Y/Y), core inflation (1.2%q/q / 5.2%Y/Y) also came in above expectations.  

Consumer Price Index — Q3 | By the numbers 

• Headline CPI was 1.2% in the September quarter, above expectations (1.1%) and lifting from 0.8% in the June quarter. Year-ended CPI declined from 6% to 5.4% (vs 5.3% expected). 

• The guages of underlying inflation all lifted in the September quarter, increasing 1.2%q/q on an index average basis. The annual pace slowed to 5.3% from 5.9%.  

• Trimmed mean CPI printed 1.2% for the quarter vs 1% expected (prior: 0.9%), with the year-ended pace declining from 5.9% to 5.2% (vs 5%).

Consumer Price Index — Q3 | The details 

Key inflation outcomes were stronger than expected in the September quarter. Quarterly inflation was 1.2% in both headline and core (trimmed mean) terms; these rates increased from 0.8% and 1% respectively in the June quarter. Year-on-year inflation continues to fall - headline came down to 5.4% from 6% and core eased to 5.2% from 5.9% - however, due to the lift in the quarterly rates, the disinflationary process in Australia can be described as having decelerated in Q3. 

The increase in quarterly inflation was driven largely by rises in fuel and electricity prices. Fuel prices surged 7.2%q/q, more than reversing the modest declines in the previous two quarters, as the uplift in global oil prices flowed through to households. Household utility prices rose 3.6%q/q, mainly due to a 4.2% lift in electricity prices, which came as annual price reviews incorporated adjustments for increases in wholesale costs. However, this rise in 'retail' electricity prices was significantly moderated by government rebate schemes; the ABS noted that without the rebates, electricity prices would have risen by an extraordinary 18.6% through the quarter. 

Household services prices continued to make a large contribution to quarterly inflation. Rents moderated slightly to 2.2% (from 2.5% in Q2), reflecting an increase in the Commonwealth Rent Assitance scheme that came into effect late in the quarter. Premium increases saw health services rise 1% in the quarter. Inflation continued to remain elevated in categories such as hairdressing services (0.9%q/q / 6.6%Y/Y) and other household services (2.1%q/q / 5.2%Y/Y), indicative of the everyday cost-of-living pressures impacting households. 

There was some relief, however, in Q3 as child care prices fell 13.2% due to increases to the Commonwealth's Child Care Subsidy scheme. This was the largest drag on quarterly inflation (-0.14ppt). Meanwhile, grocery inflation declined as fruit (-1%) and vegetable prices (-5.6%) fell in response to an improved winter harvest. In terms of discretionary spending, domestic holiday travel prices fell a further 2.5%q/q - following a 7.2% decline in Q2 - amid the off-peak season. 

Looking at a broader breakdown, quarterly inflation for goods was 1.2% and 1.0% for services, with both components increasing from the previous quarter's outcomes (goods 0.9% and services 0.8%). In annual terms, goods inflation fell from 5.8% to 4.9% while services inflation eased from 6.3% to 5.8%. Global factors are contributing to goods disinflation, including eased supply chain pressures and reduced demand. By contrast, services inflation remains elevated reflecting factors such as resilient demand (for holiday travel and other forms of recreation) and businesses passing rises in their input costs through to households. 

These dynamics were reflected in tradables inflation (influenced by global factors) cooling to a 3.7%Y/Y pace (from 4.4%); non-tradables inflation (driven by domestic factors) was 6.2%Y/Y (down from 6.9%).  

Consumer Price Index — Q3 | Insights 

Australia's disinflationary process lost some momentum in the September quarter. While this was unlikely to be a smooth process, RBA Governor Bullock said last night that the Board had taken a more cautious approach to tightening than some other central banks, partly a function of the nature of its flexible 2-3% inflation target. However, it has been made clear that the timeframe forecast for a return of inflation to target in late 2025 was at the limit of what the RBA is prepared to accept. Markets are pricing in additional tightening following today's report. 

Preview: Q3 CPI

Australia's September quarter inflation report, due today (11:30am AEDT), appears to have a lot riding on it in terms of the near-term RBA interest rate outlook. The report should confirm annual inflation is continuing to cool from last year's 7.8% peak (5.3% expected). But a return to the RBA's 2-3% inflation target is not anticipated until late 2025, a timeframe that if delayed risks seeing the Board recommencing hiking rates.  

Inflation continued to ease in the June quarter...

Australian inflation slowed in the June quarter, continuing the decline from its late 2022 peaks. Headline inflation was 0.8% in the quarter (down from 1.4% in Q1), with the year-ended pace falling from 7% to 6%. Underlying (or trimmed mean) inflation eased to 0.9% in the quarter (from 1.2%) and to 5.9% over the year (from 6.6%). These were the slowest quarterly inflation rates since Q3 2021. 

A range of factors contributed to the easing in quarterly inflation. Domestic holiday prices fell sharply (-7.2%) due to off-peak season discounting; government rebate schemes led to modest declines for utilities (-1.1%) and education (-0.2%) costs; meanwhile, health costs eased (-0.1%) as private health insurers delayed premium increases.

Going in the other direction, international travel prices elevated sharply (6.2%) for the peak summer season in Europe. There were solid price rises in furniture and furnishings (4.2%) and for clothing and footwear (0.6%), movements that looked to be counter to the disinflationary trend in global goods prices. 

Although annual goods inflation fell from 7.6% to 5.8%, prices lifted 0.9% in quarterly terms - outpacing services inflation (0.8%q/q). However, annual services inflation firmed from 6.1% to 6.3%. Overall, services inflation remained elevated whereas goods inflation continued to slow, albeit this process is lagging the pace of declines seen in other countries. 

... but progress may have slowed since

Headline inflation is expected to rise to 1.1% in the September quarter (range: 0.7% to 1.2%), which would be a 0.3ppt lift from the June quarter. The increase is expected to largely reflect rises in fuel and utilities (household energy) prices. Given the 3-month change in the ABS's monthly CPI indicator to August was 1.5%, this suggests there is some upside risk to the expected figure. Annual CPI is anticipated to fall from 6% to 5.3%, the decline reflecting base effects from a year earlier. This is close to the 3-month average (5.2%) of the outcomes from the monthly CPI indicator over June-August. Expectations for core (trimmed mean) inflation are sitting at 1.1% quarter-on-quarter and 5% year-on-year. 

Will today's report shift the dial for the RBA?

The RBA - on pause since June - is retaining the optionality to lift the cash rate above its current 4.1% setting. This was communicated in the October meeting minutes that noted the Board "has a low tolerance for a slower return of inflation to target" than its current forecasts project for late 2025; this message was reaffirmed by Governor Bullock in a speech last night. These forecasts are due to be updated for the November meeting, with today's CPI report being a key input to the revised inflation outlook. Markets responded to these developments by lifting pricing for a November hike to around a 40% chance.  There is therefore plenty of scope for that pricing to increase in the event of an upside surprise in Q3 inflation.  

Macro (Re)view (20/10) | Yields press higher

Equity markets tumbled this week as bond yields rose sharply, driven by the long end of the curve in the US. Despite this, many currencies rose modestly against the US dollar, including the Australian dollar as the RBA indicated rates may not yet have peaked; improved data from China (Q3 GDP growth printed 1.3% vs 0.9% consensus) likely also supporting. Next week's Q3 CPI data will be influential for the near-term rates outlook in Australia.

Comments from Federal Reserve Chair Jerome Powell indicated further tightening was not off the table but that the FOMC was at the point of proceeding with caution. Powell's appearance at the Economic Club of New York reiterated the sentiments of many other Fed officials in noting that higher US bond yields were contributing an additional tightening impulse to financial conditions. In his assessment, Powell said that rising yields weren't a reflection of market expectations for a higher fed funds rate, reflecting instead influences such as increased term premia, fiscal deficits, QT and US economic resilience. On the resilience factor, US retail sales were strong at 0.7% month-on-month in September (vs 0.3% expected). The control group advanced 0.6%m/m (vs 0.1%) to be up 1.6% in the third quarter - the strongest quarterly rise since Q2 2022 - reflecting robust momentum in underlying spending. 

RBA communications during the week emphasised that although rates have been left on hold at its recent meetings, the Board retains the optionality to hike further. Slowing growth and easing inflation have kept the cash rate (4.1%) unchanged since June. But that situation could potentially change if next week's Q3 CPI data prompts the RBA to revise its inflation outlook and delay the anticipated return of inflation to the 2-3% target band - currently projected for late 2025. The minutes of the RBA's October meeting noted that the "Board has a low tolerance for a slower return of inflation to target than currently expected". At a public appearance, RBA Governor Michele Bullock spoke of the series of global economic shocks that have led to elevated inflation. In a domestic context, the governor noted that services inflation, rising house prices and the robust labour market were factors that posed upside risks to the inflation outlook. 

Going back to the October minutes, the Board concluded that the incoming data and recent developments had "not been sufficient... to necessitate an adjustment in the stance of monetary policy". This week's underwhelming labour force report for September looks consistent with that message. Employment came in at 6.7k in the month, disappointing expectations (20k) and slowing sharply from a 63.3k surge in August (reviewed here). Nonetheless, the unemployment rate fell from 3.7% to 3.6% as the participation rate eased to 66.7% from a record high in August (67%). Declines in broader underemployment (6.5% to 6.4%) and underutilisation (10.2% to 9.9%) reflect that labour market spare capacity remains around historic lows. The key question coming out of the report was whether the rotation to part-time employment from the full-time segment over Q3 is potentially a sign of adjustment to weaker demand conditions. This appears to link with declines in hours worked of 0.4% month-on-month and 0.9% in Q3. 

The ECB is widely expected to switch to a pause stance at next week's meeting. Having raised its key rates by 450bps since July last year, the account of the September meeting noted there was "ample evidence" that the transmission of tighter monetary policy was taking effect - and to a greater extent than its models had anticipated - giving the impression that the Governing Council is now prepared to sit on the sidelines. As highlighted by the Spanish central bank governor Hernández in the FT, additional tightening was coming from the steep rises in euro area bond yields. This is something that could derail an earlier end to PEPP reinvestments that has been touted recently. Turning to the UK, inflation and wage data came in either side of expectations. Headline CPI was unchanged at 6.7%yr in September (vs 6.6%), while the core rate eased from 6.2% to 6.1%yr (vs 6%). A partial release of labour market data reported UK wages growth softened from 8.5% to 8.1% in August, below expectations (8.3%) but still running at an elevated pace. 

Australian employment 6.7k in September; unemployment rate 3.6%

Australian employment slowed sharply to a 6.7k increase in September, disappointing expectations. In spite of this, the national unemployment rate declined from 3.7% to 3.6% as the participation rate (66.7%) eased from record highs. The underwhelming nature of the report adds weight to the case for the RBA to extend its pause.      

September by the numbers...

• Employment increased by 6.7k (on net) in September, disappointing the consensus forecast for 20k and my own view for a 30-40k outcome. A downward revision slightly lowered August's employment gain from 64.9k to 63.3k. 

• Headline unemployment declined from 3.7% to 3.6% (vs 3.7% expected), with the broader underemployment rate falling from 6.5% to 6.4%. These outcomes took the total underutilisation rate down to 9.9% from 10.2% in August. 
• The participation rate eased from August's record high of 67% to 66.7% in September. Australia's employment to population ratio (64.4%) remains close to record highs. 

• Hours worked declined 0.4% month-on-month following a 0.5% fall in September. In Q3, hours worked declined by 0.9%. 

The details...

Employment slowed to a net increase of 6.7k in September, well down from August's 63.3k surge. After a weak start to the quarter (employment declined 0.7k in July), employment lifted by 69.2k in Q3 (2% in annualised terms) - the slowest quarterly increase (outside the Covid period) since late 2019. Over the quarter, employment increased, on average, by 23.1k per month, slowing to a pace similar to that seen in the early months of 2023.  

Drilling down further, there was a notable shift in the composition of employment gains during Q3, with full-time employment (-39.9k in September) declining by 53.2k while part-time employment (46.5k in September) increased by 122.4k. In the previous quarter, full-time employment lifted by 53.8k and part-time employment gained 35.8k.   

Rising employment and elevated levels of job vacancies show that labour demand remains resilient to the broader econmic slowdown; however, a margin of adjustment may be playing out in hours worked. Hours worked declined by 0.4% in September and fell a sharp 0.9% in the quarter. These are typically volatile estimates (and subject to revision), but it could be a sign that some workers may be working fewer hours than the 35 hours per week the ABS defines as being employed full time. An alternative explanation - one more consistent with my upbeat view on the labour market - is that Q3 was a seasonally soft period for employment and it could now lift pace into year-end. 

The key gauges of labour market slack are at historically low levels and actually declined in September. The unemployment rate fell from 3.7% to 3.6% - sitting near half-century lows - and averaged 3.65% in Q3. However, the September fall in unemployment needs to be qualified by the fact that it came alongside a decline in the participation rate from 67% to 66.7%. Nonetheless, the underemployment rate (including unemployed workers and employed workers wanting and available to work more hours) eased from 6.5% to 6.4% in the month, in line with its Q3 average (6.42%). Total labour force underutilisation (combining unemployed and underemployed workers) moved down from 10.2% to 9.9% in September, below its Q3 average (10.08%). 

In summary...

Today's report has underwhelmed with employment coming in well below consensus. The detail around hours worked was weak, as it was in August. That said, there are more questions than answers at this stage. This argues in favour of the RBA remaining on pause, but it is clear from this week's communications that next week's Q3 CPI report will be highly influential ahead of the November meeting. 

Preview: Labour Force Survey — September

Australia's Labour Force Survey for September is scheduled for release at 11:30am (AEDT) today. A strong rebound in employment in August (64.6k) held the unemployment rate to 3.7%, remaining near cycle lows. In today's report, employment is expected to moderate to a 20k increase, though I anticipate a stronger outcome in the 30-40k range. 

Labour market activity rebounded in August... 

Coming off a weak month in July - the unemployment rate lifted from 3.4% to 3.7% as employment fell by 1.4k - the labour market regained momentum in August. Employment rebounded by 64.9k in the month, well above the 25k consensus forecast. Much of the increase came from part-time employment (62.1k) with the full-time segment rising marginally (2.8k). 

... and the participation rate reached a new record high 

Alongside the strength in employment, the participation rate increased from 66.9% to 67% - a record high. This held the unemployment rate at 3.7%; however, underemployment lifted from 6.4% to 6.4%, which left the total underutilisation rate 0.1ppt higher at 10.2%. 

Total hours worked were reported to have declined 0.5% month-on-month, seemingly against the broader strength in the report. This followed a surprise outcome in August where hours worked lifted 0.2%m/m despite employment falling. Overall, hours worked over the year to August were 3.7% higher, and 10.1% above their pre-Covid level.

Conditions are expected to have moderated in September...

Employment is forecast to moderate to a 20k rise in September on the consensus estimate (range: 5k to 45k). The ABS's payrolls index was broadly flat (0.2%) over the month to the September reporting period (9/9), indicating a continuation of the momentum from August could lead to an upside result for employment. The unemployment rate is expected to remain unchanged at 3.7%.  

... but ongoing resilience in employment can continue 

The RBA has left rates unchanged since June (4.1%), with the Board awaiting the effects of its earlier rate hikes to flow through. As tighter monetary policy gains increased traction, the RBA forecasts growth to slow leading to slower employment growth that sees the unemployment rate rising to 4.5% by mid-2025. For the time being, employment growth remains solid, with the 3-month average increase running a little above 30k over recent months. I have been of the view that this is a sustainable pace for employment growth going forward, with leading indications of labour demand remaining at elevated levels. This demand is partly being supported by the rapid pace of post-pandemic population growth. 

Macro (Re)view (13/10) | Taking notice

Despite headwinds in the US Treasury market, the 10-year benchmark yield fell substantially this week on indications the Fed's tightening cycle has reached its peak. Equity performances were patchy across regions while geopolitical factors led to US dollar support. The IMF's latest World Economic Outlook forecasts that global growth - while slowing - will stay resilient this year (3%) and next (2.9%), drawing out the return of inflation to many central banks' targets until 2025. 

Commentary from a host of Fed officials during the week indicating higher bond yields can substitute for additional monetary policy tightening outweighed a mildly disappointing US inflation report. Headline CPI remained at a 3.7% year-on-year pace (vs 3.6% consensus) - up from its recent low of 3% in June with petrol prices surging by around 13% since then - while the core rate eased from 4.3% to 4.1%yr (as expected). Alongside higher petrol prices, rents (7.2%) remain a major driver of inflation. Removing these effects (and other volatile items), the underlying dynamic persists of core services inflation (2.8%yr) continuing to be much more elevated than core goods inflation, which eased to a 30-month low (1.6%yr). While now largely dated by the week's events, the FOMC's September meeting minutes conveyed there was already a degree of caution around the policy outlook. The prospect of further tightening hinged on the incoming data, though "all participants" had agreed that rates would need to "remain restrictive for some time". 

Assessments that the ECB's mid-September rate hike may have brought policy rates to their cycle peaks appeared to be largely validated by the account of the meeting. While the Governing Council elected to hike by 25bps, the decision was characterised as a "close call" as strong consideration was given to a tightening pause. Notably, there was "ample evidence" that the strength of monetary policy transmission to the real economy - a key part of the Governing Council's reaction function - was "proceeding strongly, more so than expected". Whereas the ECB's tightening cycle had been driven by the view that under-tightening presented greater economic risks than over-tightening, the Governing Council judged that at their current levels (depo rate 4%) these risks were now closer to being in balance. It also judged that - if maintained - rates should be at levels that are consistent with inflation falling back to the 2% target. 

Data in Australia was limited to second-tier releases this week that reaffirmed existing themes. The Westpac-Melbourne Institute Index improved by 2.9% in October but still remains at deeply pessimistic levels, mainly reflecting cost-of-living pressures. For businesses, the NAB Survey reported confidence among firms remained weak in September (+1); however, that belies an ongoing resilience in business conditions that remain above average (+11). A speech from RBA Assistant Governor Kent unpacked the various channels by which tighter monetary policy was working through the economy. The observation that the full effects on demand and, in turn, inflation were still in the pipeline appears consistent with the Board's tightening pause.

Macro (Re)view (6/10) | US resilience continues

It was another week in which the rise in US Treasury yields set the tone in markets. Notably, however, US equities advanced whereas Europe and Asia continued to slide. Data remained consistent with the Fed's higher for longer messaging on interest rates as ongoing strength in the US labour market was confirmed. US CPI data for September shapes as the highlight on next week's calendar. 

The handover to the new RBA Governor Michele Bullock started smoothly as the Board extended its pause by leaving the cash rate at 4.1% (reviewed here). Rates have now been on hold since June as the Board has elected to take time to monitor developments as the effects of its earlier rate hikes gain traction. But the Board has retained its conditional tightening bias, prepared to hike again in this cycle if the timeframe for returning inflation to the 2-3% target band risks becoming more protracted, currently forecast for "late 2025". It is now in the hands of the incoming data to determine whether or not further tightening is required. The RBA's Financial Stability Review detailed the nature of the adjustment households are currently navigating, with rising interest rates and high inflation causing discretionary spending to be pared back and savings to be drawn upon.  

Australian data this week reaffirmed the upswing in the housing market. CoreLogic reported the 8th consecutive month-on-month rise in housing prices, with the national index up 0.8% in September, to now be 6.6% above the January low. Housing finance commitments have risen on the back of this, posting a 2.2% rise in August (see here). Despite the buoyant conditions in the housing market, dwelling approvals remain at low levels; however, August approvals surprised with a 7% rise (see here). In other news, the trade surplus elevated to $9.6bn in August, driven by a 4% lift in exports (see here). 

A 336k surge in US nonfarm payrolls in September topped all estimates by a sizeable margin, with backward revisions adding a net 119k to payrolls over July and August. In a further signal of strength, job openings increased by 800k to 9.6 million in August. Robust labour demand held the unemployment rate at 3.8% as the participation rate remained unchanged at 62.8%. The ongoing resilience of the US labour market keeps the prospect of additional tightening in play, though average hourly earnings softened from 4.3% to 4.2%yr, well below the 5-6% range seen from late 2021 through much of 2022. 

The latest developments in the euro area showed that the labour market continues to defy broader economic weakness. The unemployment rate for the 20-nation euro area is sitting on historic lows after declining from 6.5% to 6.4% in August. Strength is holding up in the labor market despite the PMI gauge indicating that the economy contracted in the September quarter. The composite PMI for August (47.2) posted its 4th consecutive reading below the 50 line that separates contraction from expansion. Weakening demand conditions were weighing on both the manufacturing and services sectors. This was also reflected in a sharp 1.2% fall in retail sales in August (-2.1%yr). 

Australia's trade surplus widens to $9.6bn in August

Australia's trade surplus widened by $2.3bn to $9.6bn in August, printing above the $8.7bn figure expected. The widening was driven by an uplift in exports (4%) as imports softened (-0.4%) - despite surging petrol prices causing fuel imports to accelerate by almost 21% in the month.  

The monthly trade surplus increased from a downwardly revised $7.3bn in July (from $8.0bn) to $9.6bn in August. The 3-month average for the trade surplus was $8.9bn, a figure that has moderated gradually over the course of the year. Declining commodity prices have seen exports ease from record highs in mid-2022 while exports have remained close to their level from a year ago. 

Monthly exports advanced by $2.1bn (4%) to $55.7bn, driven largely by the volatile non-monetary gold component (96.7%). Non-rural goods firmed 0.5%, with a rise in iron ore exports (4.4%) just offsetting a fall in coal exports (-7.5%). Services (1.5%) were the other contributor to the rise in exports, with tourism services increasing further (2%) as the post-pandemic recovery extended to a rise of 83.2% over the year. Rural goods fell in August (-2.6%) and have declined by 12.4% from a record high 12 months ago.

Imports ($46.1bn) declined by a modest 0.4% in the month. That headline change, however, obscures some large movements beneath the surface. Capital goods fell 11.8% as industrial transport equipment and aircraft orders pulled back. Intermediate goods rose 7.2% - their largest increase since May last year - as surging oil prices saw the value of fuel imports accelerate by 20.8% in the month. Consumption goods posted a 1.7% increase as vehicle imports (3.4%) remained elevated. Services imports were up 1.6% on the back of overseas tourism (3.9%) amid the winter exodus of many Australians to Europe.